Why IT stocks are under stress despite weak rupee

Shares of Tata Consultancy Services, Infosys, Wipro, HCL Technologies, and major IT services companies were reeling under selling pressure on Friday, despite weakness in the rupee against the U.S. dollar. The sell-off in IT stocks was seen after Accenture further fuelled fears about dwindling IT spending by cutting its revenue guidance for the ongoing fiscal year. This comes a week after foreign brokerage firm JP Morgan downgraded the Indian information technology (IT) index to 'underweight' from 'neutral' earlier, citing weak demand environment for the sector still remains weak. The agency expects most IT services firms to miss current expectations and placed Infosys, TCS and MphasiS on negative catalyst watch.

Weighed down by the disappointing forecast by Accenture, shares of Tata Consultancy Services (TCS), the country’s most valued IT firm, declined as much as 0.9% in early trade today. Tech Mahindra was the top loser among IT heavyweights with a 2% loss, followed by Infosys, Wipro, and HCL Technologies, which dropped up to 1% intraday. In comparison, the BSE Sensex was trading 114 points, or 0.18%, lower at 63,125 levels.

Accenture, the U.S.-based information technology services and consulting firm, which follows a September-August financial year, has trimmed its revenue guidance for FY23 to a range of 8-9% from 8-10% projected earlier due to small deal wins in the backdrop of economic uncertainty. For the fourth quarter (Q4FY23), revenue is projected to be in the range of $15.75 billion to $16.35 billion, an increase of 2% to 6% in local currency, albeit lower than analysts' average estimate of $16.35 billion, citing foreign-exchange impact.

For the third quarter ended March 31, 2023, Accenture posted a 3% growth in revenue in U.S. dollars at $16.6 billion, and 5% in local currency over the same period last year. The net income for the quarter was $2.05 billion, compared with $1.82 billion for the third quarter of fiscal 2022.

The operating income stood at $2.36 billion, compared to $2.60 billion for the third quarter last year, while operating margin was 14.2% against 16.1% in Q3FY22.

The diluted earnings per share (EPS) were $3.15, compared to $2.79 for the third quarter last year, while adjusted EPS were $3.19, an increase of 14% from the third quarter of fiscal 2022.

New bookings for the quarter were $17.2 billion, a 2% increase in U.S. dollars and a 4% increase in local currency over the third quarter of fiscal 2022. This includes consulting bookings of $8.9 billion and managed services bookings of $8.3 billion.

Last week, JP Morgan, in a report, said that it expects demand weakness in the IT sector to intensify in the June quarter. “We feel project deferrals, halts, cancelations, and drawdowns are likely to persist in 1QFY24 without clear signs of a bottom. Such weakness is likely to be felt most in discretionary project spend areas in Apps, DX, Engineering with lower impact on legacy managed services,” the brokerage said in its report.

The agency further stated that the increased competition for a smaller pie could trigger falling win-rates, pricing and deteriorating deal terms. Adding to it, paused projects might have limited visibility of restarting and signs of demand recovery over the next 6-9 months could be low, potentially driving H2 growth expectations lower and FY24 industry growth to sub 5% YoY levels (from its previous 4-7% post 4Q results).

(DISCLAIMER: The views and opinions expressed by investment experts on fortuneindia.com are either their own or of their organisations, but not necessarily that of fortuneindia.com and its editorial team. Readers are advised to consult certified experts before taking investment decisions.)